Banks Borrowing Less from Fed Signals Credit Market Improvement

By Jeannine Aversa | April 23, 2009 | 5:08 PM EDT

Washington (AP) - Commercial banks and investment firms reduced their borrowing over the past week from the Federal Reserve's emergency loan program, a hopeful sign that some credit stresses are easing.

The Fed on Thursday said commercial banks averaged $43.1 billion in daily borrowing over the week that ended Wednesday. That was down from $48.5 billion in average daily borrowing logged over the week ended April 15.

Investment firms drew $9.2 billion over the past week from the Fed program, down from an average of $12.9 billion the previous week.

The identities of financial institutions are not released, but they now pay just 0.50 percent in interest for the emergency loans.

In another promising sign, the Fed's net holdings of "commercial paper" averaged $240.9 billion over the week ending Wednesday, a decrease of $3.7 billion from the previous week.

Commercial paper is the crucial short-term debt that companies use to pay everyday expenses, which the Fed began buying under the first-of-its-kind program on Oct. 27, a time of intensified credit problems. The central bank has said about $1.3 trillion worth of commercial paper would qualify.

The Fed also said its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae averaged $362.6 billion over the past week, up $75.4 billion from the previous week. The goal of the program, which started on Jan. 5, is to help the crippled mortgage-finance and housing markets. Mortgage rates have dropped since the Fed announced the creation of the program late last year.

Rates on 30-year mortgages dipped to 4.80 percent this week, from 4.82 percent last week, Freddie Mac reported Thursday. The all-time low of 4.78 percent was recorded in early April on records dating to 1971.

Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers. The lockup in lending has contributed to the recession, which now matches the longest since World War II.

Investment houses in March 2008 were given similar emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation's fifth-largest investment bank to the brink of bankruptcy and into a takeover by JPMorgan Chase & Co.

Critics worry the Fed's actions have put billions of taxpayers' dollars at risk.

The central bank's balance sheet now stands at $2.1 trillion, up slightly from last week. The balance sheet has more that doubled since September, reflecting the Fed's many unconventional efforts - various programs to lend or buy debt - to mend the financial system and jolt the economy out of recession.

The report also said that credit provided to insurer American International Group Inc. averaged $45 billion for the week ending Wednesday, about the same as the previous week.

Separately, the Fed said that after paying its bills it turned over $31.7 billion to the U.S. Treasury last year, a $2.9 billion decline from 2007. Fed officials said the smaller amount partly reflected last year's bailout of Bear Stearns and AIG. So-called "consolidated entities" set up by the Fed to deal with the financial crisis reported a net loss of nearly $1.7 billion.

Commercial banks and investment firms reduced their borrowing over the past week from the Federal Reserve's emergency loan program, a hopeful sign that some credit stresses are easing.